Secondary Sources: Economic Policy, Squam Lake, Fiscal Tightening

–Effective & Unpopular: Princeton University’s Alan S. Blinder, writing on the WSJ’s opinion page disagrees with the majority of Americans who now say President Barack Obama’s economic policies have failed. Instead, he says, “when the history of the period is written, it will read something like this: For a host of reasons the U.S. economy was struck by a calamitous financial crisis followed by a vicious recession. The government—including two administrations, Congress, and the Fed—marshaled enormous resources to save the financial system and to fight the recession. It worked.” The public’s negativity stems from programs like Troubled Asset Relief Program (TARP), he says. “TARP must be among the most reviled and misunderstood programs in the history of the republic. Voters are clearly appalled by the idea that their government spent $700 billion bailing out banks,” Blinder writes. “Yes, I know it’s maddening to hand over even a nickel to bankers who don’t deserve it. But doing so was a necessary evil to save the economy. Think of it as collateral damage in a successful war against financial armageddon.”

–Squam Lake Group: In a Q&A with the Cleveland Fed’s Forefront, University of Chicago finance professor Anil Kashyap likens the fragility of the financial system before the crisis to “a Ferrari that hits a pebble and crashes.” In the interview, Kashyap discusses a new manifesto from academic economists, calling themselves the Squam Lake Group, on how to make the financial system less prone to such catastrophic crisis. Among the areas of focus: “I would say the single biggest thing would be a resolution authority. Let’s suppose Greece, which just had all this trouble, had somehow spectacularly failed and then we discovered that a financial institution connected to it had a lot of exposure, and now had its solvency threatened. We’d have all the same bad choices that we had with Lehman, and I think that’s terrible. Most of the response to the crisis post-Lehman amounted to giving guarantees to different actors to get them to go along. We provided access to different types of support, loosened the rules here and there, and there was basically no way to say credibly that we were going to fail an institution. That’s a huge problem. That’s by far the single biggest priority.” The group’s recommendations are to be published this month by Princeton University Press.

–Dangers of Retrenchment: The time for belt tightening is not now, Martin Wolf writes in the Financial Times, saying “So how quickly should deficits be eliminated? We must recognise the danger here: cutting public spending will not automatically raise private spending. The attempted reduction in the structural deficit might lead, instead, to a rise in cyclical fiscal deficits, which would be running to stand still, or to a reduction in the private surpluses only because income fell even faster than spending. Either outcome would be grim. Yet neither can be ruled out… The big question, then, is whether deficits can be financed. My answer is: yes. Remember that so long as the private sector runs financial surpluses it must buy claims on the public sector, unless the developed world as a whole is about to move into huge external surpluses. True, the private sector can pick and choose among governments. But it is unlikely to abandon the US, at least. It has shown no sign of doing so, so far. The problem for peripheral Europeans is that they have little chance of an early return to growth. Markets do not trust in the political sustainability of hair-shirt economics. It is not so much fiscal deficits as an inability to grow out of them that is worrying.”

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